Investment Grade: Fitch upgrades Philippines’ credit rating

The news that everyone in the financial markets has been waiting for is finally here. Fitch Ratings announced today that it is upgrading the Philippines’ long-term foreign currency bond rating from BB+ to BBB-, the first notch in investment grade ratings.

The country’s long-term local currency issuer default rating (local currency bonds) has also been upgraded to BBB from BBB-.

The outlook on both bonds is “stable,” meaning Fitch Ratings sees the Philippines’ positive fiscal and economic fundamentals to continue in the short- to mid-term.

What a BBB- rating means

The technical definition of a BBB- rating is that the bond issuer has “adequate capacity to meet financial obligations although adverse conditions or changing circumstances may exist to lead to a weakened capacity to meet financial commitments.”

Other countries with a BBB- rating from Fitch include India, Indonesia, Turkey, Uruguay, Colombia, and six more countries.

A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12% of GDP by end-2012, up from 6% at end-2010.

Remittance inflows were worth 8% of GDP in 2012 and proved resilient even through the shock of the global financial crisis.

The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop.

Fitch expects GDP growth of 5.5% in 2013.

The Philippines has experienced stronger and less volatile growth than its ‘BBB’ peers over the past five years.

Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks.

Strong economic growth and moderate budget deficits have brought the general government (GG) debt/GDP ratio in line with the ‘BBB’ median.

Governance reform has been a centrepiece of the Aquino administration’s policy efforts. Entrenching these reforms by 2016 is a policy priority of the government.

The Philippines’ average income is low (USD2,600 versus ‘BBB’ range median of USD10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows.”

What a credit rating upgrade means

Simply speaking, a credit rating upgrade translates to a lower cost of borrowing for the Philippines. The country can now borrow funds from creditors at lower interest rates — leading to lower interest payments that would generate more savings for the government and, ultimately, more cash that can be used for government spending. It could also lead to additional inflow of foreign funds that may be enticed to invest in the Philippines because of the higher credit rating.